Oceania Dairy Group will be bought by Chinese dairy firm Inner Mongolia Yili Industrial Group. It will spend $214 million building an infant formula plant.

Yili will buy Oceania to access its land resource consents to build a plant over 38 hectares, a notice to Shanghai's stock exchange shows.

The Chinese firm said it was attracted by New Zealand's relatively cheap raw milk and the prospect of the free-trade deal with China completely removing Chinese import tariffs by 2020.

The plant is scheduled to be completed by June 2014, working at 60 per cent capacity. Annual full capacity of 47,000 tonnes is expected in the 2016-17 year.

The deal is subject to Overseas Investment Office (OIO) and Chinese government approval.

China's investment in New Zealand has been a heated topic in recent years after bids to buy large tracts of farmland forced the Government to make a U-turn on its plans to free up overseas investment and a High Court ruling made the OIO impose a more rigorous analysis of foreign purchases.

Last year, Oceania sold milk supply contracts to Synlait Milk, which is half-owned by China's Bright Dairy, after failing to raise about $75m to build a milk powder plant near Glenavy that would have processed 220 million litres of milk a year, producing 32,000 tonnes of powder.

Yili said it had a preliminary co-operation deal with some local farmers to supply milk. It also indicated plans to draw on Fonterra Co-operative Group's regulated supply of raw milk.

Oceania director Don Brash told the NewZealandInc.com website that Yili had to announce the deal once its board had decided to proceed.

Yili had been named as a potential suitor to New Zealand Dairies' South Canterbury milk processing plant in 2010, when Russian owner Nutritek Group started shopping around for a buyer.